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Limited Liability Company (LLC)

Q.1. What are the most commonly used form of Limited Liability Company in India?  What are the key differences between them?

Ans. The most commonly used form of Limited Liability Company in India is Private Limited Company and Public Limited Company.  A company can be limited by shares (liability of a member is limited up to the amount unpaid on the shares held) or limited by guarantee (liability of a member is limited up to the amount for which a guarantee is given). 

The formation, management and dissolution of limited liability companies is governed by the Companies Act, 1956, and administered by the Ministry of Corporate Affairs through the Registrar of Companies, Regional Director, Company Law Board and Official Liquidator.

Some of the key differences between a Private Limited Company and a Public Limited Company are given below.

Particulars Private Limited Company Public Limited Company
Maximum Paid Up capital Around USD 1,800 Around USD 9,000
Minimum number of members 2 7
Maximum number of members 50 No restriction
Transferability of shares to outsiders Restriction on transferability of shares No restriction on transferability of shares
Issue of Prospectus Prohibited from inviting the public for subscription of its shares Free to invite public for subscription
Minimum number of directors 2 3
Commencement of business Can commence business immediately after its incorporation Cannot start unless certificate of commencement of business is issued by the Registrar of Companies
Stautory Meeting No obligation to call the Statutory Meeting of the members Mandatory to call for a Statutory Meeting and file Statutory Report with the  Registrar of Companies

Q.2. How to incorporate a company in India? 

Ans.
The Registrars of Companies (ROC) appointed under Section 609 of the Indian Companies Act covering the various States and Union Territories, are vested with the primary duty of registering companies floated in the respective States and Union Territories in India and of ensuring that such companies comply with statutory requirements under the Act. These offices function as registries of records relating to the companies registered with them, which are available for inspection by members of the public on payment of the prescribed fee.

The steps to be followed for registering a Private Limited or a Public Limited company are enlisted here.

Step 1 [Obtaining Director Identification Number]: A Private Limited Company must have a minimum of two directors and two shareholders. And the directors must have a valid Director Identification Number (DIN), allotted by the Ministry of Corporate Affairs. The provisional DIN can be obtained by filing application Form DIN-1 online. This form is available on the Ministry of Corporate Affairs portal (www.mca.gov.in). The provisional DIN is immediately issued (provisional DIN is valid for a period of 60 days). The application form must then be printed and signed and sent for approval to the ministry by courier along with proof of identity and proof of address. The concerned authority verifies all the documents and, upon approval, issues a permanent DIN. It takes about 3-5 days to issue the permanent DIN. For more information, please visit: http://www.mca.gov.in/MCA21/RegisterNewComp.html.

Step 2 [Obtaining a Digital Signature]: At least one of the directors should have a valid Digital Signature Certificate issued by the Certifying Authorities (CA) and approved by the Ministry of Corporate Affairs (MCA). Every document prescribed under the Companies Act, 1956, is required to be filed with the digital signature of the managing director or director or manager or secretary of the company.  To use the new electronic filing system under Ministry of Company Affairs (MCA), the applicant must obtain a Class-II Digital Signature Certificate. The digital signature certificate can be obtained from one of six private agencies authorized by the MCA. For more details on the six agencies, please visit: http://www.mca.gov.in/MCA21/certifying-new.html.

Step 3 [Approval of Company Name]: The first step in the process of formation of a company is the application for MCA’s approval of the desired name for the proposed company. Application for name approval can be made online via MCA’s portal MCA 21. Select, in order of preference, a few suitable names, not less than four, indicative of the main objects of the company. Ensure that the name does not resemble the name of any other company already registered and also does not violate the provisions of Emblems and Names (Prevention of Improper Use) Act, 1950. The Registrar shall intimate, within two to three days, whether the proposed name is available or not. Once, the Company name is allotted, company registration documents are filed with respective Registrar of Companies (ROC) for registration.

Step 4 [Preparation of Documents]: After obtaining name approval from the Registrar of Companies the following documents must be prepared to incorporate the company

Memorandum of Association (MOA): The MOA is a document that sets out the constitution of the company. It contains, amongst others, the objectives and the scope of activity of the company and also describes the relationship of the company with the outside world.

Articles of Association (AOA): The Articles of Association contain the rules and regulations of the company for the management of its internal affairs. While the Memorandum specifies the objectives and purposes for which the Company has been formed, the Articles lay down the rules and regulations for achieving those objectives and purposes. It also states the authorized share capital of the proposed company and the names of its first / permanent directors.

Form 1 – providing details of promoters of the company

Form 18 – providing details of registered office of the company

Form 32 – providing details of Director, Manager or Secretary of the company

Professional help is to be sought in the drafting of the MOA and AOA, as it contains the governing policies, rules and by-laws of the proposed venture. The draft must be carefully vetted by the promoters before printing and stamping. The MOA and AOA must be signed by at least two subscribers in his/her own hand, his/her father’s name, occupation, address and the number of shares subscribed for and witnessed by at least one person. The the MOA and AOA are then required to be stamped and filed with the ROC.  Stamp duty is required to be paid on the MOA and on the AOA. The stamp duty depends on the authorized share capital and varies between states/provinces in India. E-Stamping facility is now available via MCA’s portal. The document preparation process may take five to seven days.

Step 5 [Submission of Documents to ROC and Payment of Fee]: Submit the following documents to the ROC with the filing fee and the registration fee:

The stamped and signed copies of the Memorandum and Articles of Association (3 copies).

Form-1, 18 & 32 in duplicate.

Any agreement referred to in the Memorandum and Articles of Association

Any agreement proposed to be entered into with any individual for appointment as Managing or whole time Director.

Declaration of Compliance by an advocate or company secretary or chartered accountant or director, manager or secretary of the company

Name availability letter issued by the Registrar of Companies.

Power of Attorney from the subscribers in favor of any person for making corrections on their behalf in the documents and papers filed for registration. The power of attorney should be given on Non-Judicial stamp paper of appropriate value and shall be submitted to the Registrar

The fees payable to the Registrar at the time of registration of a new company varies according to the authorized capital of a company proposed to be registered. Payment for the Registration and Filing Fee must be made by Demand Draft/Banker’s Cheque if it exceeds Rs.1000/.

Step 6 [Obtaining Certificate of Incorporation]: The ROC will issue a Certificate of Incorporation after careful review of documents submitted. Section 34(1) cast an obligation on the Registrar to issue a Certificate of Incorporation, normally within 7 days of the receipt of documents. A Private Limited Company can start its business immediately on receiving the Certificate of Incorporation.

Step 7 [Obtaining a Permanent Account Number]: Visit an authorized franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI) Investors Services Ltd to obtain a Permanent Account Number (PAN). Under the Income Tax Act, 1961, each person must quote his or her permanent account number (PAN) for tax payment purposes. The application for PAN can also be made online but the documents still need to be physically dropped off for verification with the authorized agent. For more details, see www.incometaxindia.gov.in, www.utiisl.co.in, and www.tin-nsdl.com.

Step 8 [Obtaining a Tax Account Number]: The application for allotment of a TAN must be filed using Form 49B and submitted at any Tax Information Network (TIN) Facilitation Center authorized to receive eTDS returns. Locations of TIN Facilitation Centers are at www.incometaxindia.gov.in and http://tin.nsdl.com. The processing fee for both applications (a new TAN or a change request) is INR 60 (plus applicable taxes).

Step 9 [Get registered under Shops and Establishment Act]: A statement containing the employer’s and manager’s name and the establishment’s name (if any), postal address, and category must be sent to the local shop inspector with the applicable fees. 

Step 10 [Get registered for VAT at the sales tax office]: VAT is levied on sale of goods. Any business entity proposing to carry out a works contract or trade in goods needs to register for VAT.

Step 11 [Get registered for Profession Tax]: According to section 5 of the Profession Tax Act, every employer is liable to pay tax and shall obtain a certificate of registration from the prescribed authority.

Step 12 [Get registered for Excise Tax]: Excise is an indirect tax levy on manufacture of goods. For more information, please visit: http://www.aces.gov.in/.

Step 13 [Register the company with the Employees’ Provident Fund Organization]: The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 applies to an establishment, employing 20 or more persons and engaged in any of the 183 Industries and Classes of business establishments, throughout India. The employer is required to provide necessary information to the concerned regional Provident Fund Organization (EPFO) in prescribed manner for allotment of Establishment Code Number.

Step 14 [Register for Employees’ State Insurance (ESI) Corporation for medical insurance]: The ESI Act applies to all establishments employing 20 or more persons. The ESI Act provides for sickness benefits, medical relief, maternity benefits for women workers, compensation for fatal and other employment injuries, etc. Every employee who receives wages up to Rs. 10,000 per month is covered by this Act. As per the Employees’ State Insurance (General), Form 01 is the form required to be submitted by Employer for registration. It takes 3 days to a week for the Employer Code Number to be issued. 

Steps to be taken for formation of a Public Limited Company

Apart from the 14 steps discussed above, the following must be undertaken to incorporate a Public Limited Company. 

Consent of Directors to act as such in Form No.29.

Arrange for payment of application and allotment money by Directors on shares taken or agreed to be taken.

File the Statement in Lieu of Prospectus with the ROC in schedule-iv of the Companies Act.

File a declaration in Form-20 duly signed by one of the Directors.

Obtain the Certificate of Commencement of Business.

Q.2.
Which is the most commonly used form of Limited Liability Company by foreign investors?

Ans.
Foreign companies generally float wholly owned subsidiaries in India by forming a Private Limited Company, subject to compliance with the Foreign Direct Investment (FDI) policy. A Private Limited Company offers maximum flexibility to conduct business in India as compared to branch, liaison office and project office.

Another advantage over other forms of business vehicles is that a subsidiary company can meet its funding requirements through equity and / or debt (foreign and local) and internal accruals.

Q.3.
How are profits of subsidiaries of foreign companies taxed in India?

Ans.
Subsidiaries of foreign companies are treated on par with domestic companies.  In other words, subsidiaries are treated as a domestic company for tax purposes.  Accordingly, the profits of such subsidiaries are taxed at the rate of 30% which needs to be further increased by surcharge of 5% [applicable only if the taxable income exceeds INR 10 million]. An education cess of 2% and secondary and higher cess of 1% is applicable in addition to the above tax.

Further, if a subsidiary company’s tax liability is less than 18.5% of its book profits, the book profits are deemed to be total income and Minimum Alternate Tax at the rate 18.5% (plus applicable surcharge and education cess) of book profits is levied. 

A tax at the rate 16.2225% is levied on the domestic company declaring dividends.

Q.4.
Whether Foreign Direct Investment (FDI) is allowed in Companies?

Ans.
FDI Policy provides for sectors in which FDI is permitted and prohibited. FDI can be brought under Automatic Route (i.e. no Government approval is required) or under Approval Route (Prior approval of Government required).